“Tax the Rich” Sounds Like a Great Idea Until This Happens
European commissioners ruled Tuesday that Apple must repay billions in back taxes shunted through an unstaffed Irish subsidiary. Google, Amazon, Starbucks, eBay, Microsoft, Yahoo, and McDonalds are next on the chopping block.
Good luck with that.
They’ve started a pissing match they cannot win.
Worse, in their rush to “tax those evil rich corporations,” revenue-hungry commissioners have just damned any hope Europe ever had of a recovery.
Worse still, you’re going to pay for it unless you understand how to play the situation profitably.
Let’s start with the ruling itself.
European commissioners in Brussels have decided that a special deal between Apple and Ireland’s tax authorities favors Apple and, because it is unavailable to other companies in similar situations, null.
According to those same commissioners, the deal allowed Apple to get away with paying next to nothing on more than $180 billion in income, virtually all of which was shunted through the Emerald Isle to its offshore fund. Initial calculations place the tab at around $14.5-$21 billion, plus interest over the past decade.
Naturally, that set traders on edge over fears that this would tank the company’s stock.
Apple’s market cap is $575 billion at the moment. The company has produced $220.4 billion in revenue the first six months of this year alone. It sold $24 billion in iPhones alone during the second quarter.
Financially speaking, the penalty is little more than a slap on the wrist, even though it makes for great headlines. Taxing “evil rich corporations” always does.
But, here’s the thing.
This ruling is a retroactive penalty that not only breaches Ireland’s sovereignty but also opens the door to a complete rewrite of international tax law.
That’s hard to understand if you’re not in the world of high finance, so let me put what’s happening in context.
What the E.U. commissioners are attempting to do with this ruling would be like Her Majesty’s Revenue & Customs Department trying to assess back-taxes on everyone and every corporation that has profited in America since it became an independent nation. It’s a blatant cash grab that violates national sovereignty based on laws that “should have been” instead of what they are.
CEO Tim Cook has called the probe “political crap” and I agree – only I’d be tempted to use far stronger language in the process were I in his shoes.
What you need to understand is that this is yet another example of legislative overreach by bureaucrats who do not understand how real money works, nor the consequences of their actions.
Let’s start with Apple itself.
The company employs 22,000 workers in Europe with another 257,000 working in other countries. A further 1.4 million people rely on Apple for income when you include developers and retailers at more than 700 Apple Resellers and official Apple stores.
Punitively level taxes, and guess where employment goes?
Right out the door… to nations that actually have a positive view of success, business development, and financial transparency. Like, oh, I don’t know… Singapore, Malaysia, Taiwan, or even China. I’ll bet Apple takes on a decidedly Nordic flavor before this is done.
This ruling will not only crater current employment, but also eliminate tens of thousands of future jobs if it sticks. That’s because Apple will pull hundreds of millions of dollars in capital investment from the E.U.
So will every other company caught in the crosshairs.
Nobody’s talking about that right now – but they will be when Apple and dozens of other targeted companies starting freezing hiring, closing facilities, and stopping professional development programs intended to create high value jobs that Europe desperately needs.
I feel terribly for millions of European students who are going to see their careers vanish before they’ve even had a chance to start them.
Now for the “fun” part.
You and I are going to pay for this madness.
U.S. Taxpayers Will Foot the Bill for the E.U.’s Cash Grab
That’s because U.S. companies doing business in foreign countries also pay taxes here and those are offset dollar for dollar by foreign taxes paid. In other words, Apple is potentially entitled to a U.S. tax credit for all foreign taxes paid.
So let’s imagine for a moment that the E.U. move is successful, and that Apple has to pay the estimated $21 billion in taxes to Ireland that it allegedly owes. That will be offset – meaning that Apple’s U.S. tax bill will be reduced by – you guessed it – $21 billion.
And guess who has to make that up when the government falls short?
You and me.
Uncle Sam has two choices to make up the difference: a) raise taxes or b) borrow more money. Either way, we pay and the politicians who got us into this mess escape responsibility for having done so yet again.
All is not lost though, at least not for investors anyway.
First, this case has been building for several years and will probably take several more years to litigate. Apple will likely build up huge reserves in the meantime, on top of the resources it’s already accumulated for precisely this purpose, so by the time a payment is ultimately negotiated, it will be a non-event, affecting neither earnings nor the balance sheet.
Second, Apple is not a party to the E.U.’s tax treaties. The core of the case here is that the E.U. is telling Ireland to get Apple to pay. Ireland can tell the E.U. to go pound sand… or watch for an “Irexit” on the grounds that everybody is sick and tired of the E.U. telling sovereign nations what they can and can’t do to attract jobs.
Third, money always flows to where it is treated best. That means an entirely new stream of profits for Apple and every other company put through the ringer above and beyond any wind-down related to hostile, punitive taxation.
Tactically, what you want to do is think about the upside.
I know that this is counter-intuitive but stick with me for a moment.
No doubt there will be some short term downside from investors and traders who panic. That’s actually your entry.
The simplest way to make this trade is to set a Lowball Order out there for any company you want to buy. Apple, for example, may make sense at $90 a share.
More aggressive investors could use sell put options and accomplish the same thing with the added benefit of being paid to “go shopping.”
Either way, you’ve got a great opportunity that, once again, is made possible by feckless politicians who cannot grasp the Law of Unintended Consequences like we can grasp the Laws of Money.
Until next time,